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Lawyers and lawyering

Words matter. What we call something matters. The name we give something usually provides people with the first opportunity to form an opinion about that something, so it's important that the name fits.

I hate "alternative billing." (If someone quotes me on this, make sure they include the quotation marks.) It's a terrible term; one that does injustice to the concept. As I've said before, it has a seamy connotation to it, like "alternative lifestyle." It seems vaguely Berkeley or Brookline or (gasp) Vermont, which makes tradition-bound lawyers very uncomfortable. We need an alternative for "alternative."

And I don't like the "billing" part any better. First, it makes it seem like the issue is about invoice styles, which makes it more boring than the Tax Code or, say, professional soccer. ("Woo! Another one-nought blowout!") Second, it places the focus on the law firm and its adminstration, rather than on the client and the value it is getting.

The intellectual godfather and guru of this ill-named field, the Verasage Institute's Ron Baker, has long advocated "value pricing" as the preferred term. [Update: Ron points out in the comments that he prefers "fixed price" when talking to the customers themselves; "value pricing" is more of a behind-the-scenes term.] It's definitely an improvement, and it is far more descriptive and accurate. The main idea, of course, is that lawyers should price their services based on their value to the client. (Gee, it sounds so obvious when you say it like that.) But my quibble is that the word "value" has Walmart-y connotations. People often connect "value" with "discounted," and that's missing the point entirely.

I propose a different approach:

Open-price lawyering.

What we're talking about here is legal services where the price is known to the customer ahead of time, so that the customer can make an informed decision about the worth of those services to him or her before actually agreeing to buy them. In other words, the price is out in the open. There is a fair exchange between lawyer and client with the client having as much knowledge about the price as the lawyer.

And what's the opposite of open-price lawyering?

Hidden-price lawyering.

The price is hidden from the client (and, often, even from the lawyer). I'm not saying that in a judgmental sort of way, like the lawyer is intentionally hiding the price from the customer. Well, maybe I am. But even if it is unintentional, that's no excuse for doing it.

Clients of the world: which would you rather have — open-price lawyering or hidden-price lawyering? Sound off in the comments, or reply to me on Twitter at @jayshep.

For the first eight years of running ... Shepherd Law Group, Shepherd billed clients by the hour. But soon after starting the firm he began to research everything about the billable hour, including how long it had been in use and whether a fixed-pricing model could even work.

...

His next step was to analyze eight years worth of bills from his firm, to figure out what was driving costs. Did his clients feel like they got their money’s worth and did his firm feel like they got paid fairly? He had read that you can’t do litigation on a fixed-fee basis, and 80 percent of his firm’s work is litigation.

“Now, after doing it for three years, I’m here to tell you, you can do litigation on fixed fees. It all comes down to, what is the service ... worth to the client?”

If there's a money quote in the article, it's probably this one, talking about how lawyers see themselves as being something more than other businesspeople:

“We’re so resistant as a group to thinking of ourselves as a business. But we are a business. We’re not a priesthood. It’s not a guild.”

Read the entire piece here. (Note: the article continues onto a second page. The next-page link is tucked in after some sponsored links.)

Over the past day and a half, I've gotten bunches of emails and tweets all asking the same questions: Had I read the Wall Street Journal story? What about the Corporate Counsel piece? Is the billable hour really dead? What do you have to say?

Here's what I have to say:

Come on in. The water's fine. What took you so long?

(Our firm, Shepherd Law Group, completely abandoned hourly billing nearly three years ago. We haven't billed — or even tracked — a single hour since 2006.)

In fact, the billable hour isn't dead (yet), but you're forgiven if you thought this had happened based on what you read Monday. Quick recap: The front page of The Wall Street Journal had a story called "'Billable Hour' Under Attack" (subscription possibly required). The story was written by Nathan Koppel and Ashby Jones, who wonderfully cover the Journal's legal beat. It's a great piece (although I have no idea why "billable hour" is in quotes in the headline). They report on the efforts of companies like Pfizer, Cisco Systems, and American Express to rein in legal spending by moving work away from hourly billing and into fixed-price arrangements. They write:

The companies are ditching the hourly structure — which critics complain offers law firms an incentive to rack up bigger bills — in favor of flat-fee contracts. One survey found an increase of more than 50% this year in corporate spending on alternatives to the traditional hourly-fee model.

Make sure you also watch the video sidebar with an interview of Amy Schulman, Pfizer's general counsel (it's about three minutes):

Also Monday, Corporate Counsel magazine ran a piece called "Two Veteran Lawyers Say Now Is the Time for Fixed Fees." WilmerHale lawyers William Lee and Benjamin Heineman wrote it (I hope they didn't suggest the title). In it, the veteran lawyers decry the billable hour and trumpet the benefits of fixed prices:

For in-house counsel facing tremendous budgetary pressures, the fixed fee addresses the problems caused by the hourly rate, such as unpredictability, high costs divorced from actual value and, most importantly, the maddening law firm definition of "productivity" — defined as more lawyers and more hours per matter.

Both articles are steps forward in the war on the legacy systems and guild mentality entrenched in most law firms and reflected in the billable-hour business model. But don't think for a moment that this is the end of the billable hour, or even the beginning of the end. But it is — to paraphrase Churchill — perhaps, the end of the beginning.

As I've often said, the issue is not about invoicing methods. It's much deeper than that. We're talking about changing the dominant business model of an entire industry, and that's not going to be done with a couple of articles. In fact, these two articles show how far we have to go.

Let me explain: There are three basic concepts that are at the root of misunderstanding about how the law-firm model works. They are cost, profit, and price.

Cost. No customer anywhere gives a flying something through a rolling doughnut what a law firm's costs are. That's the firm's problem. Think about it: have you ever gone to a store to buy something and wondered about the retailer's costs? Of course not. Yet when you read the veteran lawyers' article in Corporate Counsel, costs are about the only thing they talk about. Clients don't care about whether you can reduce your costs, boys.

Profit. Profit is what's left for a firm after you subtract cost from revenue. A customer shouldn't really care about your profits, other than having a vague understanding that a vendor needs to make profits (eventually) to justify being in business in the first place. Beyond that, though, the customer doesn't care. In fact, there's no earthly reason why the customer should even know what your profits are. It might be different if you were publicly traded, but no American law firms are. It's ironic that large law firms voluntarily self-report their profits (and more importantly, their profits per partner) and then have clients complain about the firms' profit margins. When you listen to the Journal's video of Pfizer's Schulman, notice how many times she refers disparagingly to law firms' profit margins. ("You're going to have to get used to making less money.")

Price. And what is price? Get ready to write this down: Price is simply the measurement of something's value to a customer. It's as simple as that. It has nothing to do with profit. It has nothing to do with cost. The price of anything is the value that thing has to a particular customer at a particular time. Anyone who tells you otherwise needs to go audit Economics 101 at the local community college.

Nearly all law firms practice cost-led (or more accurately, cost-plus) pricing. In other words, they base their prices on their costs. WilmerHale does. Pfizer's "legal alliance" firms do. All these firms track their lawyers time on timesheets, and base their associates' performance and pay at least partly on hours billed.

Read what the Wilmer veterans have to say about cost:

As in all business, a total price for a matter or a book of business is built up from costs (and, at times, also derived from the significance of the matter). One of the most important issues in setting fixed fees is distinguishing between a law firm's actual costs (which firms see), and the actual costs, plus profit margins for the partners (which is what clients see in a firm's bills). A second, related problem is that the history of costs to the company may be an imperfect guide. Past bills are an aggregation of hourly rates (plus out-of-pocket costs), which may reflect inefficiencies.

Huh? No, fellas. The price depends on only one thing: the amount the customer will pay at that time. You can prattle on all you want about costs and budgets and efficiencies and inefficiencies, but it doesn't matter a whit. It's up to you to set a price that is less than or equal to the value the client places on your service. If you do, you'll be hired for the job. If the value to the client is high enough, you should be able to charge enough so that your revenue exceeds your costs, giving you a profit. But don't expect your client to care about your costs or your profits — that's not their job.

Both articles talk more about controlling costs and lowering law firms' profit margins. They don't talk about increasing value to the client. To really change the system, value — not costs — must lead pricing. Then firms won't have any use for timesheets.

As I said, it's the end of the beginning. But there's a long way to go.

My brother Bill Shepherd is a world-class salesperson. Literally. He has sold many millions of dollars of services and products all over the world. (Fans of our sister blog, Gruntled Employees, will remember Bill from "Of sticker shock and empathy," which describes his near-death experience — my wedding).

Bill and I often talk about business — at least when we're not talking about the Red Sox. He often has terrific ideas on how I can further grow my law firm's business. Many of them are about running the firm more like a business than like a law firm — which is something I've consistently tried to do over the past eleven years.

One of his suggestions was to do what most businesses do to stimulate sales: hire salespeople. That's an idea that makes a lot of sense. But there's a major problem. Salespeople are generally paid on a commission basis. Rule 5.4 ("Professional Independence of a Lawyer") of the Model Rules of Professional Conduct (which govern the conduct of lawyers in almost every state) mandates that

A lawyer or law firm shall not share legal fees with a nonlawyer ….

(There are four exceptions, which aren't relevant to our discussion; they have to do with dead lawyers and things — call Haley Joel Osment). Bottom line: you can't pay commissions to nonlawyer salespeople. So that idea's a bust.

Or is it?

If you can't pay commissions to nonlawyer salespeople, what about paying commissions to lawyer salespeople? Saleslawyers, if you will. (You would never call them that, of course. They would be business-development attorneys, or something.)

As our friends over at the incredibly well-written, popular, and snarky blawg Above the Law have chronicled, it has been a tough year for associates at large law firms. (See their joint project with Law Shucks: the Layoff Tracker.) There have been more than 5,000 associates laid off by major US law firms since the beginning of last year.

What percentage of the 5,000 laid-off associates would have the aptitude and desire to be commissioned saleslawyers? They would still be lawyers, of course. But their focus would be on selling their firms' services to prospective clients. They would get valuable experience interacting with clients and learning about their firms' practices, but they wouldn't have to worry about billable-hour requirements and office memoranda. And if they were good at their jobs, they could make a bunch of money.

I particularly want to hear from associates, especially laid-off ones. Could you see yourself working as a business-development attorney? Put your thoughts in the comments below, or reach out to me with an @reply or DM on twitter at @jayshep.

• • •

By the way, just how popular is Above the Law? Well, last Thursday, ATL ran a seven-word blurb in its daily "Non sequiturs" post that included a link to this blog. Those seven words plus a link caused Client Revolution traffic over the next two days to increase by 2,300 percent. Yowza. Thanks, guys!

So I'm watching the Red Sox beat up on Roy Halladay and the Jays on NESN, and during the C-break (that's cool TV-speak for commercial break) in the middle of the eighth, I see the one million and seventh ad for the New England Toyota Dealers. The Toyota dealers have long been a sponsor of Red Sox games on NESN, and their ads are always noisy and tedious, usually with an evil earworm of a jingle.

The current run of Toyota ads all follow the same pattern: We see an old, nondescript (and non-Toyota) car in a driveway or at a drive-through window, with a voiceover that asks, "Need a new car?" Then a huge crane-claw (is that what they're called?) reaches out of the sky and grabs the car, breaking all the windows. (Apparently, it's a form a skyhook. Whatever.) The car gets lifted up about 20 feet, and then a brand-new Toyota drops out from the old car and crashes to the ground. Oh .... kay. Why or how this happens is completely beyond me.

But that's not what gets me. It's the disclaimer in tiny white letters that appears at the bottom of the screen:

"Do not attempt."

What the what? Seriously?

Some lawyer for the New England Toyota Dealers watched this ridiculous ad and said, "Uh, you know, someone might try this at home and get hurt and sue us. We better put a warning on it." And apparently the dealers listened to this joke of a lawyer, because they added "Do not attempt" to the ads for a fleeting second or two. (Of course, if they were really worried, they might have made the disclaimer actually visible to humans.)

This is why real people hate lawyers. Because it shows that lawyers think real people are stupid. So stupid that they might hurt themselves trying to lift their old Renault 18i (or whatever) with an imaginary skyhook in hopes of getting a shiny new Toyota to drop out of it. But everyone knows that's impossible. You can't even find a Renault 18i anymore!

Lawyers: quit assuming that real people are stupid. And car dealers: if you think you need a disclaimer like that to defeat a lawsuit from an unfortunately injured carjacker, then you probably need better lawyers.

• • •

By the way: if you do what the ad says and go to buyatoyota.com, you'll see the following disclaimer at the bottom of the website:

You are now in Buyatoyota.com and Toyota Motor Sales, U.S.A. is not responsible for the accuracy of content.

Of course not.

(My disclaimer: The images above (except for my arrows) are copyrighted by the geniuses at New England Toyota Dealers, who care about your safety.)

I learned about Michael Jackson's death yesterday on Twitter about an hour before CNN reported it.

I use TweetDeck on my Mac, and one of the columns I keep open is TwitScoop, which flashes Twitter's hottest topics and newly trending items. The trending words and phrases literally grow in size with their increasing popularity. As I watched late yesterday afternoon (at 5:36 p.m. EDT — click image on the right to magnify), I started to see "Michael Jackson," "MJ," "hospital," and "died." Pretty soon, that's all anyone was tweeting about. CNN and other traditional newsmedia websites had nothing. As I said, it took a full hour before the networks "confirmed" his death.

There will be many stories written about this new phenomenon of news dissemination; that the story first broke on a blog (TMZ.com — click image on the left to magnify) and was tweeted around the world at lIghtspeed; and that the old media couldn't compete with the new social media. Digital-journalism guru Jeff Jarvis is already the leader in the clubhouse with his post, "The King of Twitter." (I'm a big fan of Jeff and his book, What Would Google Do? See my earlier post covering it.) Here is the money quote from Jeff's piece:

If the Iraq War was the birth of CNN could Iran and Jackson mark the start of their decline in influence?

Jeff answers his own question, "Too soon to say." But he follows this up with what I find to be a more important conclusion:

Journalists end up playing new roles in the news ecosystem.

To that I would add the qualifier successful. Successful journalists and media organizations will play a new role, but many will shuffle off into oblivion, carping about the death of newsprint.

Now don't get me wrong: I love newspapers. My brother-in-law and sister-in-law have been print journalists. I get two newspapers each day: The Boston Globe seven days a week, The Wall Street Journal six days, and The New York Times on Sunday. A few weeks ago, I was quoted for the first time in a Journal article about a noncompete case I litigated. I read the story online the night before, but it wasn't real for me until I saw it in print. But I suspect that that's just a generational thing, and my millennial colleagues wouldn't have had that same reaction.

But no one will deny that newspapers are in serious trouble. The old model doesn't work anymore. Fewer people will accept the rising subscription costs for something that they can read online on their iPhones and not have to worry about recycling.

This brings us to one of the central themes of The Client Revolution:

A business model succeeds, and then the world changes. The most successful players under the old model resist the change, and then the old model gets replaced.

In this blog, we talk mostly about the guild model of law firms with their anticlient legacy systems like hourly billing, lockstep salaries, and legalese. But we're seeing it in many other industries, where market dominators with previously successful business models are slipping away as the world changes out from under them. Newspapers, television networks, record companies, American automobile manufacturers, real-estate agencies, video stores, airlines … and, yes, law firms.

Management über-guru Peter Drucker had this to say about how successful companies greet innovation:

Market domination tends to lull the leader to sleep; monopolists flounder on their own complacency rather than on public opposition. Market domination produces tremendous internal resistance against any innovation and thus makes adaptation to change dangerously difficult.

The story of Michael Jackson's death will inform on the need for newspapers and cable-news companies to change — and fast — before being made irrelevant by blogs and Twitter and other forms of Media 2.0. The newspaper model succeeded for more than a century, but it might not survive this decade. The CNN model took off during the first Gulf War, but its demise may be reported alongside stories of the Iranian elections and the death of Michael Jackson.

Even Michael Jackson himself could be a case study. He released the most successful album in history, with twice as many copies sold as the runner-up. Pundits explained his unmatched (and unmatchable) commercial success with his ability to appeal to audiences black and white, male and female, American and international; he was the first real "crossover" star. His success led the way for countless other artists to broaden their appeal. He changed the music business.

But he released Thriller nearly 27 years ago. He enjoyed incredible success, but then the world changed, and he never reinvented himself, and his leadership was gradually replaced with nostalgia. He released just four more albums with declining sales figures. Unlike other artists who were able to reinvent themselves over time to maintain their success — the Beatles and Madonna come to mind — Michael Jackson did not. (None of this is intended as serious music criticism. "Paul, I think I told you, I'm a lawyer, not a fighter.")

Reinventing a successful business model is very difficult. It will be hard for the newsmedia. It will be hard for law firms, especially the ones that have been so successful.